Cayman Islands: Surge Predicted In Global Assets Under Management

With an overview of the conditions that the global asset
management industry will face over the medium term, PwC examines
the impact on the leading offshore fund domicile.

With significant implications for the Cayman investment fund
sector, research from PwC predicts that global assets under
management (AuM) will rise to around US$101.7 trillion by 2020,
from a 2012 total of US$63.9 trillion. This represents a compound
annual growth rate of nearly 6%.

The report, Asset Management 2020: A brave new world, finds that
assets under management in the SAAAME (South America, Asia, Africa,
Middle East) economies are set to grow faster than in the developed
world in the years leading up to 2020, creating new pools of assets
that can potentially be tapped by the asset management industry.
However, the majority of assets will still be concentrated in the
US and Europe.

The report also predicts that alongside rising assets, there
will be rising costs. The costs of responding to and complying with
regulation will remain high. Fees will be under continued pressure
amid the ongoing push for greater transparency and comparability
from investors and policymakers. Investment in technology and data
management will need to be increased in most cases to maximise
distribution opportunities and to cope with regulation and
reporting. In addition, full transparency over investment activity
and products will exist at all levels, resulting in there being
nowhere for noncompliant managers to hide as regulatory and tax
reciprocal rights extend across the globe.

Asset managers will need to respond

PwC has identified six game changers that asset managers will
have to analyse and address in order to capitalise on the
opportunities this changing landscape presents:

Asset management moves centre stage:
Asset management has long been in the shadows of its cousins in the
banking and insurance industries. By 2020, it will have emerged
definitively from their shadows.

Distribution is redrawn – regional and global
platforms dominate: By 2020, four distinct regional
fund distribution blocks will have formed which will allow products
to be sold pan-regionally. These are: North Asia, South Asia, Latin
America and Europe. As these blocks form and strengthen, they will
develop regulatory and trade linkages with each other, which will
transform the way that asset managers view distribution
channels.

Fee models are transformed: By 2020,
virtually all major territories with distribution networks will
have introduced regulation to better align interests for the
end-customer, and most will be through some form of prohibition on
having the asset manager allocate to distributors as evidenced in
the UK's Retail Distribution Review (RDR) and the Markets in
Financial Instruments Directive II (MiFID II). This will increase
the pressures of transparency on asset managers and will have a
substantial impact on the cost structure of the industry.

Alternatives become more mainstream, passives are
core and ETFs proliferate: Traditional active
management will continue to be the core of the industry as the
rising tide of assets lifts all strategies and styles of
management. But traditional active management will grow at a less
rapid pace than passive and alternative strategies, and the overall
proportion of actively managed traditional AuM will shrink. PwC
estimates that alternative assets will grow by some 9.3% a year
between now and 2020, to reach US$13 trillion.

A new breed of global managers: 2020
will see the emergence of global managers, with highly streamlined
platforms, targeted solutions for the customer and a stronger and
more trusted brand. These managers will not only emerge from the
traditional fund complexes, but from among the ranks of large
alternative firms, too.

Asset management enters the 21st
century: Asset management operates within a
relatively low-tech infrastructure. By 2020, technology will have
become mission critical to drive customer engagement, data mining
for information on clients and potential clients, operational
efficiency and regulatory and tax reporting. At the same time,
cyber risk will have become one of the key risks for the industry,
ranking alongside operational, market and performance risk.

More recently, PwC's 18th Annual Global Survey of more than
1,300 CEOs, which includes responses from 155 Asset Management CEOs
in 46 countries, found that Asset Management CEOs are also
confident about revenue growth. A high of 88% are either
'very' or 'somewhat' confident about their revenue
growth, rising to 95% over the next three years. China and the US
are viewed as the most important countries for growth
prospects.

However, with fees under pressure from the rise of ETFs and
passive funds, asset management CEOs remain vigilant on costs, with
almost half (46%) aiming to cut costs in 2015 and 28% looking to
outsource.

More than a quarter of asset managers reported entering a new
segment of the industry over the past three years. A further 18%
say they have looked into doing so. Indeed, PwC has seen asset
managers disrupt banking by, for example, acquiring portfolios of
real estate loans and lending to corporates. Alternative asset
managers have broadened their product ranges to include private
lending arrangements, primary securitisations and off balance sheet
financing.

Asset Management CEOs see their future competitors coming from
technology, financial services or business services. Already
'robo adviser' business models are appearing to threaten to
disrupt wealth management activities through automating asset
allocation.

From a business perspective, 68% of asset management CEOs are
concerned about the availability of key skills whilst 63% fear
mounting cyber threats, such as data security, which have become an
ongoing business risk. What is more, even seven years on from the
financial crisis, lack of thrust in business remains a concern
according to 61%.

On the regulatory front, asset management CEO anxiety about tax
issues is a constant theme. 67% in PwC's survey state an
internationally competitive and efficient tax system should be a
government priority in their country, although half see government
as having failed to achieve this. However, they do see some
benefits from regulation with 53% saying improved regulatory
coordination is increasing crossborder capital flows.

What does this mean for the Cayman Islands?

From a Cayman perspective this predicted growth is certainly
positive news. Home to the majority of the world's offshore
alternative fund products, including hedge and private equity
funds, Cayman will without a doubt continue to fulfil a crucial
role in the industry.

With regard to alternatives in particular, which is especially
relevant from a Cayman perspective, alternatives will become more
mainstream. As noted earlier, alternative assets are predicted to
grow by some 9.3% a year between now and 2020, to reach US$13
trillion. It should also be noted that the majority of assets will
still continue to come from the US and Europe – which are the
traditional stronghold markets within which Cayman funds are
distributed and from which they are managed. Such growth is
predicted within the environment of a maturing alternatives
industry, which will also experience the rise of the so so-called
'mega manager'. In other words, growth in alternatives AuM
does not necessarily indicate a proportional increase in the number
of managers or funds coming to market. The Cayman industry and all
of its participants need to be cognisant of this dynamic.

The PwC research confirms that regulatory and tax reciprocal
agreements will continue to expand across the globe. It can
therefore be expected that the Cayman Islands Monetary Authority
(CIMA) will continue to negotiate and refine its regulatory and tax
cooperation agreements with its global regulatory counterparts.
Furthermore, arrangements similar to the Cayman Islands Governments
(CIG) recent Model 1B Intergovernmental Agreement reached with the
US pursuant to the US Foreign Account Tax Compliance Act (FATCA)
are planned to be expanded to multiple jurisdictions.

Cayman will continue to stay at the forefront of such regulatory
and tax transparency initiatives, thanks in part to a constructive
and consultation based relationship that exists between CIMA, CIG
and the private sector. Other recent developments in this regard
have included bringing master funds into the scope of the mutual
funds law and the recent registration and licensing regime for
directors to certain Cayman registered funds. All of these are
examples of appropriate responses to the international regulatory
agenda.

Considering these growth prospects, for the Alternatives sector
in particular, there will be significant opportunity, and the
influence and reach that Cayman has as a relevant player in the
financial services industry will continue to be significant.

To download a copy of Asset Management 2020, please
visitwww.pwc.com/assetmanagementPwC's
report'Redefining competition in a world without
boundaries: Asset Management Summary', is based on
the response from 155 asset management CEOs in 46 countries. To see
the full results of PwC's 18th Annual Global Survey, please
visitwww.pwc.com/ceosurvey

About the Author

Graeme Sunley is a Partner as well as the Asset Management and
Territory Leader of PwC Cayman Islands. He has nearly 20 years of
professional experience and specialises in Alternative Investment
Fund products with a variety of strategies and legal structures.
Graeme is a Past President of the Cayman Islands Society of
Professional Accountants and former member of the Executive
Committee of the Cayman Chapter of AIMA.

Originally published in Cayman Finance
Magazine, 2015-2016, Issue 2

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